DUBAI, March 20 (Reuters) - Lebanon is embarking on an ambitious plan to bolster its telecommunications industry with a tender to run its two state-owned mobile telephone operators. But as with many of the country’s economic plans, politics and entrenched financial interests may get in the way.

The country wants to become a digital hub for the Middle East, selling excess bandwidth to other countries. It hopes a dynamic telecommunications sector will spur growth in other industries such as education, health and finance.

Given Lebanon’s large number of entrepreneurial businessmen, and its history as a cultural cross-roads for the region, the idea makes sense. But progress is likely to be limited by divisions among the country’s many political factions and the government’s reliance on telecommunications as a revenue source.

“Lebanon is well placed with its geographic location and an educated and multilingual population,” said Kenechi Okeleke, an analyst at Business Monitor International in London.

“But the government’s strict control over the sector makes it really difficult for private sector firms to enter, which will continue to hold back the market.”

STATE HANDS

Lebanon’s telecommunications sector is largely in state hands, with the fixed network maintained by government-owned Ogero Telecom while the two mobile operators, Touch and Alfa, are owned by the state but currently managed by Kuwait’s Zain and Egypt’s OTMT. The government sets prices for all operators. Touch is the market leader, with a 53 percent share of Lebanon’s mobile phone subscribers.

Zain took control of Touch in 2004 and OTMT of Alfa in 2009, and their management contracts have repeatedly been renewed since then, usually on an annual basis. Both were due to expire on Jan. 31 this year, but have been extended until June 30 to give time for a tender for new five-year contracts.

Bidding will open in mid-April, said Karim Kobeissi, a senior advisor to Lebanon’s Ministry of Telecommunications.

“Some international companies have made enquiries, but nothing is concrete yet,” he told Reuters, declining to reveal the contract terms because the tender document had not yet been finalised.

Although Zain and OTMT have expressed interest in continuing to operate Touch and Alfa, the tender could replace them if there is competition from experienced international telecommunications operators, such as those in the Gulf.

But regardless of the result of the tender, the structure of Lebanon’s telecommunications market may continue to hinder growth. Sydney-based consultants BuddeComm said that because operators must obtain state approval for pricing and product launches, they have little incentive to expand networks efficiently, “resulting in suboptimum network design and poor quality of service”.

Mobile phone subscriber numbers nearly tripled between 2008 and 2012 as prices fell; revenue per user dropped 42 percent over the same period. But mobile phone penetration in Lebanon was still only 91 percent of the population in 2012, lagging much of the Middle East, where rates in some countries are above 100 percent as customers own multiple accounts.

The government slashed broadband Internet subscription fees by more than three-quarters in 2011, but they remain above regional norms.

“Lebanon trails behind other countries in the region in almost all aspects of broadband networks and services,” BuddeComm wrote in a report. “There have been many complaints that Lebanon’s poor broadband services negatively impact economic development, leading to the loss of jobs overseas.”

CIVIL WAR LEGACY

The state’s desire to keep control of the telecommunications infrastructure may in part be a legacy of Lebanon’s 1975-1990 civil war; sectarian political parties are determined to prevent parts of it from falling under their enemies’ influence, in a nation where political and business interests are often blurred.

The government’s tender to manage the mobile operators is being issued after proposals to privatise them early last decade failed to go ahead. A plan to sell off the fixed network also foundered.

“Lebanon is still a frontier market,” said Okeleke at Business Monitor International. “There is hardly any country that has maintained a high level of state control over the telecom sector that has been as competitive or innovative as more liberalised markets.”

The government’s Telecommunications Regulatory Authority (TRA), launched in 2007, aims to change that. “The TRA would like the private sector to be involved as much as possible in the market itself,” said Imad Hoballah, acting TRA chief executive.

But the TRA’s powers have been trimmed by the Shura Council, a government legal body, and the state’s dependence on telecommunications revenues means outright sales of large equity stakes in operators may not be feasible for many more years.

Touch and Alfa had combined revenue for 2011 of $1.6 billion, of which $1.4 billion went to the government, Business Monitor International estimates - making telecommunications the second-largest contributor to state coffers, after taxes on goods and services.

Under the reform plan, the two mobile firms would keep separate networks but a state-owned company could be created to own the operators’ transmitter tower assets; the government might then sell a separate contract to run this.

Meanwhile, telecommunications services - loosely defined as anything that entails interaction with end-users - and so-called “intelligent” infrastructure, which Hoballah described as switches, antennas and routers that transmit information, would be opened to private investment.

The TRA has also recommended that the government legalise Internet-based phone services known as Voice over IP (VoIP), which analysts say is a prerequisite to become an international data hub.

To accomodate a bigger telecommunications industry, Lebanon this month signed an agreement with Cyprus to boost its international interconnectivity, currently among the lowest in the region, via submarine cables. This deal will increase Lebanon’s capacity to send data to Europe five-fold by the end of the second quarter, Hobollah estimated.

A blueprint for integrating the telecommunications sector with other industries still needs approval by the Council of Ministers, however, and Hoballah said this had been delayed by issues surrounding Lebanon’s electoral law.

He declined to elaborate, but political parties have so far been unable to agree on the terms of parliamentary elections due this summer, disputing how constituencies should be divided and the extent of proportional representation in the vote.

This stand-off, along with political tensions over the civil war in neighbouring Syria, has paralysed government decision-making and could delay the elections.

Kobeissi insisted the mobile tender would go ahead regardless of the elections, while some other telecommunications reforms could if necessary be implemented by his ministry without the Council’s go-ahead.

“It will create a lot of jobs, increase GDP and government revenue,” he said. “It will create investment opportunities and revenues for the private sector.”